Market participants will receive an update on Australia’s labor market in the week ahead, amid signs of slower-than-expected growth.
Among the data points set for release, the Australian Bureau of Statistics (ABS) will unveil fresh figures Wednesday on the country’s employment situation for November. The numbers come after 19k jobs were shed in the prior month, underscored by a loss of 10.3k full-time positions.
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Meanwhile, the unemployment rate in October inched back up to 5.3%, where it resided in August, and the participation rate reverted to 66%, where it was in June.
Reserve Bank of Australia’s (RBA) governor Philip Lowe noted that the pace of unemployment has remained “steady” at around 5.25% over recent months and is expected to stay at around that level for “some time, before gradually declining” to a little below 5% in 2021.
Also, growth in wages continued to languish, with little indication of any upward momentum in the near-term. The RBA continued that a further gradual lift in wage growth would be “a welcome development and is needed for inflation to be sustainably within” its 2% to 3% target range, adding that, taken together, “recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.”
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The Burden of the Central Bank
The RBA at its latest monetary policy meeting in early December elected to keep its record low cash rate unchanged at 0.75%.
The level falls against a backdrop of other ultra-low, zero or negative interest-rate policies at a host of global central banks – aimed at stoking stubbornly muted levels of inflation in their respective territories and enabling less expensive export prices to help grow their economies.
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However, while the RBA, as well as the Bank of Japan (BoJ), the U.S. Federal Reserve, the European Central Bank (ECB), the Swiss National Bank (SNB) and Sweden’s Riskbank, among others, have maintained policy rates at extremely low or negative levels at least since December 2008, the dovish strategies do not appear to have ignited comparable economic growth.
In fact, the International Monetary Fund (IMF), for example, had lowered its global growth outlook to 3.0% for 2019, its lowest level since 2008–09 and a 0.3% downgrade from its April 2019 WEO.
The Washington, D.C.-based organization underscored how manufacturing activity has “weakened substantially” – to levels not seen since the global financial crisis – while increasing trade and geopolitical tensions have promoted greater uncertainty over the future of the global trading system and international cooperation more generally, “taking a toll on business confidence, investment decisions, and global trade.”
The IMF continued that while increased monetary policy accommodation has “cushioned” the impact of these tensions on financial market sentiment and activity, its overall outlook “remains precarious.”
According to the IMF, the annual rate of real gross domestic product (GDP) in Australia for 2019 and 2020 are expected to slow to 1.7% and 2.3%, respectively, from 2.7% in 2018, while unemployment is anticipated to decline to 5.1% through 2020 from 5.3% in 2018.
Fiscal Maneuvers
Against this backdrop, Australia’s government under the leadership of Prime Minister Scott Morrison, recently cut its expected budget surplus by A$2bn, while also lowering its targets on forward-looking surpluses.
The recent mid-year economic update placed Australia’s first anticipated surplus since the global financial crisis at A$5bn, down from an initial A$7.1bn, while an expected excess of A$11bn in 2021 was nearly halved to A$6.1bn.
Overall, around A$22bn had been slashed from the nation’s surplus outlook over the next four years, which roughly translates into a debt load that comprises close to 2% of GDP by 2029-30, up from the 0% that was previously factored into the budget.
Marc Chandler, the chief market strategist at Bannockburn Global Forex, pointed out that Australia’s Treasurer Josh Frydenberg’s reduction of the budget surplus had fallen amid signs of weaker growth, which had been cut to 2.25% from 2.75% in the year through June 2020, while the pace of wage growth was also lowered.
Chandler said the “key takeaway is that the Australian government does not intend to use fiscal stimulus to support the economy as others, such as New Zealand and Japan, intend. Monetary policy will still have to bear the burden, and this will increase speculation that the Reserve Bank of Australia may introduce an asset purchases program next year.”
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Financial Markets’ Response
Against this landscape, the yield on Australia’s 10-year government note fell 10 basis points Monday to around 1.153%, while the S&P/ASX 200 advanced about 1.63%, amid better-than-expected Chinese factory production and retail sales.
Also, the iShares MSCI Australia ETF (NYSEARCA: EWA), which has among its top holdings financial sector firms such as the Commonwealth Bank of Australia (OTCMKTS: CMWAY) and Westpac Banking Corp (NYSE: WBK), as well as retail giant Woolworths Group (ASX: WOW) – was essentially unchanged Monday at $22.86, after gaining around 26.65% since its latest 52-week trough set in late December 2018, according to the IBKR Trader Workstation.
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In terms of currency, Chandler added that after rejecting the $0.6940 area before the weekend and “the bearish shooting star candlestick, there was no follow-through selling of the Australian dollar” Monday. It remained “little changed, unable to resurface above $0.6900, and finding support near $0.6870.”
Investors will also likely be watching other Australian data in the week ahead, including new home sales from the Housing Industry Association (RBA) for any effects RBA’s stimulus may be having on other parts of the country’s economy.
On Australia’s Economic Calendar:
Tuesday, December 17
- Westpac Leading Index (Nov)
Wednesday, December 18
- Housing Industry Association (HIA) New Home Sales (Nov)
- Employment Change (Nov)
- Unemployment Rate (Nov)
- Participation Rate (Nov)
In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.
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